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One Analyst Says Tax Increase Inevitable

January 14, 1986

WASHINGTON (AP) _ As federal officials surveyed the impact of an upcoming government-wide spending cut of nearly 5 percent, one business analyst predicted Tuesday that the law forcing the cuts also will trigger a major tax increase by year’s end - possibly including a consumer tax on gasoline.

That assessment was delivered by Paul R. Huard, vice president of the National Association of Manufacturers, who claimed that a tax hike this year is inevitable under the Gramm-Rudman budget-balancing law.

He told a business seminar that the Reagan administration and Congress would resist any form of tax increase at first, but that Congress would be gripped by paralysis by summer as it struggled unsuccessfully to make additional spending cuts required under the act.

With congressional elections fast approaching, lawmakers will opt for a ″quick and dirty″ tax hike to avoid triggering sweeping spending cuts in popular programs, Huard predicted.

″The conventional wisdom that you can’t pass a tax increase during an election year is no longer valid,″ he said, forecasting higher taxes on businesses and some form of energy tax, probabably ″a tax on gasoline at the pump.″

His comments came as federal agency heads sought to make sense of a White House announcement that spending cuts of 4.3 percent in all domestic programs and 4.9 percent for the military will be required on March 1 under the Gramm- Rudman law.

Department officials generally said calculations on what the cutbacks would mean for Americans who benefit from various federal programs would not be known specifically until later in the week.

Congress, however, exempted roughly $23.6 billion in specific benefit programs administered by the Labor Department, according to department officials.

Among them are the $22.4 billion Unemployment Insurance Trust Fund, $834 million in black lung disability payments and the $211 million federal program that guarantees payments of private pension benefits.

In addition, workman’s compensation benefits totaling $75 million and $57 million of the $250 million program to compensate federal employees disabled on the job were exempted, Labor Department sources said.

Officials, however, pointed out that those exemptions include only benefits, and that administrative costs in for each of the programs still have to be cut by 4.3 percent.

″We don’t have a lot of flexibility from one program to another,″ David Demerest, a Labor Department spokesman, said of other non-benefit activities under the agency.

″It’s going to affect the Bureau of Labor Statistics just about like it does OSHA (The Occupational Safety and Health Administration).″

He said there would be some ″picking and choosing″ within specific programs, but that generally the percentage cuts were fixed and across-the- board .

An analysis by the House Education and Labor Committee said the March 1 cutbacks would result in a $170 million cut in funds for the federal compensatory education program, a $224.8 million cut in student aid, and a $43.6 million cut in the federal vocational and adult education program.

The committee document also said the cutbacks would mean a $159.2 million cut in the Labor Department’s training and employment services budget, a $15 million cut in a federal jobs program for senior citizens, a $96 million cut in low-income energy assistance and a $62.7 million cut in the federal program for handicapped people.

The law is designed to eliminate the federal deficit by 1991 through a series of decreasing annual deficit targets. Automatic spending cuts would be triggered each year if Congress fails to come up with either spending cuts or tax increases to meet the annual deficit targets - beginning with a $11.7 billion spending cut on March 1.

Social Security payments are exempted from the cutbacks.

The 1986 deficit target is $172 billion, even though congressional and administration budget officials have estimated the actual 1986 deficit at roughly $220 billion. However, Congress - for this year only - limited the scope of the automatic spending cuts to $11.7 billion.

The Office of Management and Budget and the Congressional Budget Office were scheduled to jointly issue a report on Wednesday detailing the March 1 cuts and making official the $220 billion 1986 deficit estimate.

Last year’s budget deficit was $212 billion. Decades of deficit spending have given the nation a total accumulated deficit - the national debt - of over $2 trillion.

President Reagan, in a brief exchange with reporters on Tuesday as he posed for pictures with visiting Ecuadorean President Leon Febres Cordero, declined to answer questions in detail about the deficit, but said, ″We’ll deal with it.″

When a reporter asked ″how bad″ the cuts would have to be, Reagan replied, ″I never consider any cuts bad.″

At Tuesday’s seminar on the impact of Gramm-Rudman on businesses, sponsored by the National Association of Manufacturers, the former chief counsel for the House Budget Commitee, Wendell Belew, agreed that a tax hike in 1986 was a possibility.

Belew, who helped draft the House version of Gramm-Rudman, said any alternative to automatic cuts ″has to have a tax element.″

He also said the new deficit figures will make it even harder to make the 1987 deficit target under Gramm-Rudman of $144 billion, perhaps requiring between $60 billion and $70 billion in spending cuts instead of the $50 billion earlier claimed by the Reagan administration.

In a related development, the National Taxpayers Union on Tuesday announced the filing of a lawsuit ″on behalf of America’s 60 million children″ in federal court here against Treasury Secretary James A. Baker III seeking to block further deficit spending by the government.

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